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Tuesday, October 14, 2008

US Begins Bank Nationalization Program

Items of Interest:

Treasury Secretary Hank Paulson announces $250 Billion Bank BailoutTreasury Secretary Henry M. Paulson Jr. announces the bank bailout plan Tuesday morning in the Cash Room at the U.S. Treasury in Washington, DC.

Washington Post:
U.S. Forces Nine Major Banks To Accept Partial Nationalization — Dow Soars 11 Percent; Biggest Point Gain Ever — The U.S. government is dramatically escalating its response to the financial crisis by planning to invest $250 billion in the country's banks, forcing nine of the largest …

Reuters:
U.S. to pump $250 billion into banks, markets rally -- U.S. Treasury Secretary Henry Paulson said nine banks that he described as "healthy institutions" had agreed to accept government stakes for the good of the U.S. economy -- a government intervention unthinkable before the credit crisis...
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WSJ:
U.S. to Buy Stakes in Nation's Largest Banks -- The nine banks getting about $125 billion of the $250 billion:
  • Citigroup: $25 billion
  • JPMorgan: $25 billion
  • Bank of America and Merrill Lynch: $25 billion
  • Wells Fargo: $20 - 25 billion
  • Goldman Sachs: $10 billion
  • Morgan Stanley: $10 billion
  • State Street Bank: $3 billion
  • Bank of New York Mellon: $3 billion
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NY Times:
Paulson Says Banks Must Deploy Capital -- Describing the government’s financial bailout plan as “extensive, powerful and transformative,” Treasury Secretary Henry M. Paulson Jr. said Tuesday that the injection of $250 billion into the nation’s banks was needed to restore confidence and avoid a collapse of the financial system...
Discussion:
Josh Marshall / Talking Points Memo: PUBLIC OWNERSHIP WATCH
RELATED:
Mark Landler / New York Times:
U.S. Investing $250 Billion in Banks — WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, according to officials. The United States is also expected to guarantee new debt issued …
Discussion:
Mark Thoma / Economist's View: A $250 Billion Dollar Investment
Barry Ritholtz / The Big Picture: Long Overdue Capital Injection
Afferent Input / Angry Bear: All your banks are belong to us
Jeff Matthews is not making this up:
Hank Listens Up -- So now that all those Wall Street hotshots are running to the government as the buyer of last resort, it seems only fair that those hotshots give up the most valuable piece of the capital structure: ownership.

Is it any wonder that Hank Paulson—the former head of Goldman Sachs, and one of the hottest of those hotshots—didn’t want to do that in the first place?

Brad DeLong / Grasping Reality with Both Hands:
Offers You Can't Refuse: Henry Paulson Edition
Discussion:
Kevin Drum / Mother Jones: The New Paulson Plan
Peter Whoriskey / Washington Post:
Bank Program Reignites Debate on Executive Pay
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Root Problem: Flawed Lending System

Barry Ritholtz / The Big Picture:
Goal: Increase Minority Homeowners by 5.5 Million in a Decade --

Understand this simple fact: In an ultra-low rate environment, where prices are appreciating rapidily, and mortgaes are being securitized, ALL THAT MATTERS IS THAT THE BORROWER NOT DEFAULT IN 90 days (or 6 Months). The goal was to make a loan that did not default in that period of time, it cannot be put back to the originator.

As a mortgage salesman, you only lose your a fee if a borrower defaults within 3 or 6 months. What do you do to maximize your returns? The best way to do that -- to put people in houses that would not default in 90 days -- was the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. By then, it was no longer your problem.

Can you grasp what a monumental change this was? Instead of making sure that borrowers could pay back ALL OF THE 30 YEAR FIXED MORTGAGE, you only had to find people who could afford the teaser rate for a a few months. THIS WAS AN ENORMOUS AND UNPRECEDENTED SHIFT IN LENDING...
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Dr. Doom speaks

Bloomberg:
Roubini Sees Worst Recession in 40 Years, Stock Drop -- Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, driving the stock market lower after it rallied the most in seven decades yesterday.

``There are significant downside risks still to the market and the economy,'' Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. ``We're going to be surprised by the severity of the recession and the severity of the financial losses.'' ...

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Safety in Numbers = Clustering on CNBC

Clusterf#@k to the Poor House - The CNBC Decabox CNBC Decabox

video / The Daily Show:
Clusterf#@k to the Poor House - The Decabox -- The enormity of this economic collapse is so huge that eight MSNBC pundits aren't enough.
Discussion:
Adam Warner / Options Report:
The DecaBox is Here! -- The Daily Show did have a great idea though; one participant needs to be etched off...
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More good news.

CNNMoney:
Home prices may plummet, but taxes won't -- Owners who've seen a steep drop in their home's value shouldn't expect to get a break on their property taxes...
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William L. Anderson / Lew Rockwell:
Krugman and the Nobel Fraud -- Whether it is the discussion of medical care or the nation’s financial system, Krugman believes that the state through edicts and the use of force can eliminate scarcity, a point of view he has not changed throughout the years. The Nobel Laureate, in the end, is just another statist hack and nothing else...
RELATED:
Why Mr. Krugman Deserves His Nobel - Editorial , Financial Times
The Politicization of the Nobel Prize - Editorial , Investor's Business Daily
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Monica Langley / Wall Street Journal:
Wall Street Donors Resent Being Blamed by McCain — NEW YORK — Sen. John McCain badly needs the cash infusion and momentum from a Tuesday night fund-raiser in New York. But the senator's recent demonizing of Wall Street made it tough to lure contributors, with Wall Street …
Discussion:
Yves Smith / naked capitalism: Charlie Munger: Leash and Collar Wall Street
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